New CEPR Policy Insight - The Legacy of the Pandemic: How Covid-19 is Reshaping Economic Policy in the EU
The European economic policy response to the Covid pandemic has broken new ground, in terms of its ambition, the tools used, and its institutional characteristics. A new CEPR Policy Insight by Marco Buti and George Papaconstantinou shows how three sets of factors have come to define this policy response: an evolving understanding of macroeconomics; the nature of the current crisis; and policy learning from the financial crisis.
The pandemic is also provoking broad changes in attitudes and policy priorities that go beyond the traditional success factors of economic policy response. Four sets of factors are highlighted in this report: redefining the new boundaries between state and market, revisiting the nature of subsidiarity, reconnecting the EU domestic with the global agenda, and learning to respond to longer term structural shifts. These will be crucial in shaping the legacy of the pandemic for European integration.
Marco Buti*, European Commission; George Papaconstantinou, European University Institute
The report demonstrates how the current policy response represents a significant ‘stepping up’ and a break with past policy. An evolution in macroeconomic policy since the Great Financial Crisis has enabled a better understanding of debt sustainability, the right mix of fiscal and monetary policy, and the role of central banks. The nature of the Covid crisis has also required a more communal response from the whole of the EU, giving rise to less ‘moral hazard’ and has resulted in broad support for Next Generation EU, even from traditionally ‘frugal’ countries. Another defining element was the reaction to lessons from the eurozone financial crisis, which resulted in forceful and persistent monetary and fiscal policy responses, and effective coordination of national policies.
The result has been a largely coherent response – economically, institutionally and politically – which in many ways has broken new ground for European policymaking. This is true in terms of instruments (use of grants, new ‘own resources’, issuance of common debt), institutional mechanics (the return of the so-called Community method), as well as in terms of the sheer magnitude of the underlying fiscal effort and liquidity provision at both national and EU levels.
“The policy response to the current crisis, with the Next Generation EU initiative at its heart, is breaking new ground".
The authors review the emerging institutional landscape at EU level, with its combination of rules-based and institutional features and assesses the critical factors for successful implementation of the Recovery and Resilience Plans at national level.
Looking forward, the authors describe how the global pandemic has shifted attitudes and redefined ‘successful’ policies across many areas that will likely shape the legacy of the pandemic for European Integration. Of particular importance are the newly emerging boundaries between state and market, the notion of subsidiarity in the new environment, reconnecting the EU/domestic with the international/global agenda, and the need for EU economies and policy-making to deal with longer-term structural shifts taking place.
“Covid-19 is forcing us to rethink attitudes and policies across a number of areas that will shape the legacy of the pandemic for European integration”.
Whether the response to the pandemic marks a fundamental shift in the paradigm of European integration, or it remains an exceptional one-off arising under extreme duress, will depend on the EU successfully addressing the shaping factors highlighted in this report.
*Marco Buti writes in his personal capacity.
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